Forward-Looking Decision Making

Individuals and families make key decisions that impact many aspects of financial stability and determine the future of the economy. These decisions involve balancing current sacrifice against future benefits. People have to decide how much to invest in health care, exercise, their diet, and insurance. They must decide how much debt to take on, and how much to save. And they make choices about jobs that determine employment and unemployment levels.Forward-Looking Decision Makingis about modeling this individual or family-based decision making using an optimizing dynamic programming model.Robert Hall first reviews ideas about dynamic programs and introduces new ideas about numerical solutions and the representation of solved models as Markov processes. He surveys recent research on the parameters of preferences--the intertemporal elasticity of substitution, the Frisch elasticity of labor supply, and the Frisch cross-elasticity. He then examines dynamic programming models applied to health spending, long-term care insurance, employment, entrepreneurial risk-taking, and consumer debt.Linking theory with data and applying them to real-world problems,Forward-Looking Decision Makinguses dynamic optimization programming models to shed light on individual behaviors and their economic implications.

Foreword	p. vii
Preface	p. ix
Basic Analysis of Forward-Looking Decision Making	p. 1
The Dynamic Program	p. 1
Approximation	p. 5
Stationary Case	p. 6
Markov Representation	p. 7
Distribution of the Stochastic Driving Force	p. 9
Research on Properties of Preferences	p. 10
Research Based on Marshallian and Hicksian Labor Supply Functions	p. 13
Risk Aversion	p. 15
Intertemporal Substitution	p. 17
Frisch Elasticity of Labor Supply	p. 19
Consumption-Hours Complementarity	p. 20
Health	p. 23
The Issues	p. 23
Basic Facts	p. 25
Basic Model	p. 26
The Full Dynamic-Programming Model	p. 31
The Health Production Function	p. 35
Preference Parameters	p. 36
Solving the Model	p. 37
Concluding Remarks	p. 38
Insurance	p. 42
The Model	p. 43
Calibration	p. 45
Results	p. 46
Employment	p. 50
Insurance	p. 52
Dynamic Labor-Market Equilibrium	p. 53
The Employment Function	p. 58
Econometric Model	p. 59
Properties of the Data	p. 64
Results	p. 65
Concluding Remarks	p. 69
Idiosyncratic Risk	p. 70
The Joint Distribution of Lifetime and Exit Value	p. 73
Economic Payoffs to Entrepreneurs	p. 74
Entrepreneurs in Aging Companies	p. 82
Concluding Remarks	p. 85
Financial Stability with Government-Guaranteed Debt	p. 87
Introduction	p. 87
Options	p. 92
Model	p. 94
Calibration	p. 100
Equilibrium	p. 101
Roles of Key Parameters	p. 113
Concluding Remarks	p. 115
Appendix: Value Functions	p. 116
References	p. 119
Index	p. 123
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Forward-Looking Decision Making

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